Compound
Basics * Aka Compound Finance * DeFi * Compound Labs is a San Francisco based company * "Compound is an open-source, autonomous protocol built for developers, to unlock a universe of new financial applications. Interest and borrowing, for the open financial system." * “Compound is a protocol on the Ethereum blockchain that establishes money markets, which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset. Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying) a floating interest rate, without having to negotiate terms such as maturity, interest rate, or collateral with a peer or counterparty.” * With over $113M worth of Total Locked Value (TVL) as of now (9-2019), the platform has quickly ascended the ranks into second place on DeFi Pulse (Maker is on number 1) * From Proof of Work #74 (21-9-2019): ''ERC-2212'': Earning Interest Stakes was introduced. How it works * From the DeFi Rate review: "Compound leverages web 3.0 wallets such as Metamask, Brave Browser or Coinbase Wallet for access into their ecosystem. Once connected, users are brought to the Account Overview section. From here, users can select any asset(s) and unlock the market they wish to interact with. After an asset has been enabled, users are then able to supply or borrow said asset, but never both." "Simply put, cTokens represent your balance in a specific Compound market. Each market has its own cToken (cETH, cUSDC…), which you’ll receive when you supply that asset to the protocol. As such, you’ll earn interest on all cTokens held in your wallet based on the respective lending rate." * A step by step walkthrough can be found here. Governance * From the DeFi Rate review: "Compound governance is currently centralized with hopes to transition to a community and stakeholder controlled protocol in the future. Current governance cases include: * Listing new cToken markets * Updating market interest rates * Updating oracle addresses * Withdrawing cToken reserves * Choosing new admins According to a recent (25-4-2019) article from HackerNoon, Compound currently falls in the middle of the centralized/decentralized spectrum thanks in large part to it’s open sourced smart contracts and permissionless magrin monitoring. As mentioned above, the future implementation of a cToken DAO should allow for markets and interest rates to be governed by community voting rather than the current structure where all rules are set by Compound themselves." How decentralized is Compound? * ConsenSys Codefi released (9-2019) a scoring website for DeFi projects. As of 2-11-2019 it has also analysed Compound: "Compound’s high scores can be attributed to strong performance in both the smart contract and financial risk categories. Compound has the highest liquidity index score of the group and has maintained high collateral ratios. In addition to releasing public code audit and running a bug bounty program, Compound is the only platform that has released a formal verification report." * Was classified Degree 3 DeFi on the HackerNoon rankings of 25-4-2019. "These DeFi products are non-custodial, have permissionless initiation of margin calls, and permissionless provision of margin call liquidity, while centrally administering price feeds, centrally controlling interest rates, and centrally controlling platform developments and updates." * A BIG side note, is that the blog was written by Kyle J Kistner who is Chief Vision Officer at bZx. He gave his own project the highest ranking. What a surprise. * From the comprehensive blog post: "Custody: Compound smart contracts are open source and non-custodial from the point of loan origination. Initiating Margin Calls: Margin monitoring and margin call initiation is permissionless, incentivized, and decentralized. Margin Call Liquidity: Provision of liquidity is permissionless, decentralized, and incentivized. A 5% discount on any collateral liquidated provides the incentive to monitor, initiate, and provide liquidity for margin calls. Price Feeds: Compound price feeds are centralized and imputed directly by a whitelisted address controlled by Compound. Manipulation of the price feed by Compound itself is mitigated by the existence of a sensitivity parameter that prevents updates from being moved outside a range of 10% per hour. Interest Rates: Currently interest rates are centrally determined. In Compound v2 the same model will initially be deployed, though later there will be a cToken DAO that allows for lenders to vote on the interest rate parameters of their respective money market reserves. The cToken DAO approach is less decentralized than an orderbook approach because an orderbook gives the entire market input into the interest rate. However, the cToken DAO approach is far more decentralized than a single central party determining the interest rate model parameters. Development: Compound contracts are centrally developed and open source. The v1 contracts are not mutable except for the interest rate logic contracts while the v2 contracts are mutable. The v2 protocol is made up of a series of cToken contracts. In the beginning, Compound will have central control over the cToken contracts, but control will be ceded to a cToken DAO that can change the contracts with a time delay of 48 hours." * Compound requested (28-8-2019) an audit by ZeppelinOS: "The Compound team currently administers all aspects of the protocol to decide which assets can be loaned, the interest rate model for each asset, and how the system obtains price feeds. They also control various economic parameters including collateral requirements and the size of the incentive used to encourage third parties to liquidate under-collateralized loans. These decisions can significantly affect the usefulness and safety of the system, so users must trust the Compound team to choose them wisely. Additionally, the contracts include code hooks in most operations that ensure system-wide consistency across several markets, and can also be replaced to handle unexpected circumstances. However, in the hands of a malicious or compromised administrator, these privileges contain the ability to trivially freeze markets, censor transactions or steal all assets from the system. Similarly, control of the price feed can be used to steal most, if not all, assets from the system. Currently, the same externally owned account is the administrator for all live markets. To address these concerns, the Compound team intends to replace the existing administrator role and the price feeds with more decentralized governance mechanisms. However, the resulting mechanisms will still have these powers and should be designed carefully to either restrict how they can be exercised or to ensure they can withstand the large incentive to unfairly bias the system." Is it trustworthy? * From this extensive blog criticising Centralized and Decentralized Finance (16-12-2019): "Our gripe with decentralized solutions is simple. You have to put your trust in the code, or better said in the people who wrote and audited it. Ameen Soleimani’s research has shown that although Compound is decentralized and open source, the private (admin) key is centralized and creates a single point of failure for the entire platform. If it ever gets compromised, all the lending pools can be drained of funds or even burned. Similarly, the same administrator account provides price feeds (oracle) for all live markets. All decentralized solutions will most likely have the same powers and have to be designed in mind with this. Even though the founders claim there are various security precautions made to prevent this from happening, no security model is perfect. And since Compound is a decentralized project, can they really be held liable for potential losses? Compound has passed through four security audits by OpenZeppelin and Trail of Bits. Each audit has found issues of at least medium severity, but with diminishing frequency and severity. Summary: + Established as the biggest decentralized player + Relatively good liquidity + Repeated audits show a trend of less frequent and severe vulnerabilities +Clear jurisdiction ''- Admin private key is a central point of failure'' ''- Oracle (price feed) vulnerability is hard to solve"'' Business Model * "Compound is unique in the sense that there is no native token required to utilize the platform. As such, it’s interesting to consider the future implementation of something like Binance Coin (BNB) or Nexo Coin (NEXO) which could allow for key actors to gain additional exposure to the protocol’s success." * From DeFi Weekly #52 (27-11-2019) "In order for Compound to extract fees they're more or less going to have to become regulated which means... KYC! So when/if that happens, Compound's defensibility may go down as liquidity moves away. The reason why I say that is that actors in DeFi don't actually care about the entity providing capital, as long as it provides capital at good rates. We saw this first-hand with Dharma when they started subsidising loan origination. After the subsidies were cut we saw a sharp 40% decline in liquidity. Orders with the P2P loan matching were also present but I wouldn't count it as a large reason. The counter force which Compound is banking on is creating a larger developer community and integrating with more end user applications (exchanges, wallets etc). Since Compound is based in the US and not fully decentralised, they're still under the mercy of the SEC." Team, investors, partnerships Team * Created by Compound Labs which has a team of about 12 members (6-2019) * Robert Leshner; CEO, has previous financial experience as a co-chair for San Francisco’s Revenue Bond Oversight Committee * Geoffrey Hayes; CTO, worked together with Robert building Postmates and Safe Shepard * Calvin Liu; Biz dev & business strategy Investors * Compound has been financed through equity deals in multiple rounds. * Raised an $8.2M seed round in May of 2018. Lead by industry giants including but not limited to Andressen Horowitz, Polychain Capital, Coinbase Ventures and Bain Capital Ventures * From EthHub #88 (19-11-2019): "Compound Raises a $25mil Series A. The Series A was led by popular investors a16z, Paradigm, Bain Capital ventures and Polychain Capital. Compound said it doesn’t have a clear business model yet but this recent raise will give the company plenty of time to sustain itself for now." Partners * Part of WBTC * Partners with Wyre (As of 28-10-2019 on the website of Wyre) Category:Companies/Organisations